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Tax Updates for 2021 and 2022

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Rödl & Partner Tax Matters Volume 2022-2, published February 1, 2022


With the start of the tax preparation season for 2021 as well as upcoming 2022 estimates, we would like to draw your attention to recent changes as well as expired tax provisions for businesses and individuals.


Internal Revenue Code ("IRC") Section 163(j) – Interest expense limitation

For tax years 2019 and 2020 the deductible interest expense limitation was raised from 30% of adjusted taxable income ("ATI") to 50% for all taxpayers except for partnerships. From 2021 onwards, the limitation is reduced back to 30% of ATI. This might limit the deductible interest expense for 2021. Moreover, for taxable years beginning after 2021, deductions for depreciation, amortization, or depletion are not taken into account in calculating ATI. The latter should be taken into consideration for 2022 estimates.


Temporary full deduction for certain business meals

The IRS issued Notice 2021-25 that allowed businesses to deduct 100% of the food or beverage expenses paid to restaurants from January 1st, 2021, through December 31st, 2022. To be eligible, a business owner or employee needs to be present, and the expense cannot be lavish or extravagant under the circumstances.


Notice 2021-63 clarified that businesses can apply the 100% deduction to the meal portion of per diem rates or allowances paid or incurred during the above-mentioned time period. The same applies to self-employed individuals.


Food and beverages provided at employer-operated eating facilities, even if operated by a third-party, are not eligible for the 100% deduction.


Section 174 – R&E expenditures

For tax years beginning after December 31st, 2021, R&E expenditures and software development costs must be capitalized and amortized over 60 months (15 years for expenditures attributable to foreign research).


The R&E credit under IRC Section 41 refers to section 174 to define expenses that are considered "qualified research". Therefore, it is likely that amounts treated as qualified research expenditures for purposes of the R&E credit will also be capitalized under amended Section 174. However, the IRS and Treasury have not yet released guidance on how to properly apply the new regulations, in particular regarding an accounting method change or other various technical issues.  The definition of R&D under 174 is so broad (much broader than the credit), that many expenses can be classified as R&D. We hope the IRS will issue guidance in this regard.


The draft of the 'Build Back Better Act' includes an extension of the deductibility of research and software development expenses. If the bill becomes law, expenses paid through the end of 2025 would be eligible for the deduction.


Sick and Family Leave Credit

The Sick and Family Leave Credits as well as Paid Leave Credit for Vaccines introduced as Covid-19 relief for employers expired on September 30th, 2021. The same applies to self-employed individuals.


Employee Retention Credit

The Employee Retention Credit expired on September 30th, 2021. Only recovery startup businesses remain eligible through the end of 2021. Employers that requested and received advance payments for the 4th quarter 2021 need to repay any excess advance payments.


Extended reporting for partnerships on Schedule K-2 and K-3

Starting for tax year 2021, Schedules K-2 and K-3 replace line 16 on the prior Schedule K and K-1 which reports foreign transactions as well as line 20(c) which reported other items. The intention of the new schedules is to assist partnerships in providing its partners with the information necessary for the preparation of their own tax returns.


The new schedules also apply to foreign partnerships that are reported on Form 8865 in their partners tax return. 


The new requirements will result in increased reporting for partnerships.


Energy credits

At the end of 2021 multiple energy credits expired. These include, among others, the credit for certain nonbusiness energy property (IRC section 25C), the credit for alternative fuel vehicle refueling property (IRC section 30C), and the credit for construction of new energy efficient homes (IRC section 45L).


Employer dependent care benefits

For tax year 2021 employer-paid dependent care benefits were increased up to $10,500. As in 2020, unused benefits that would have been excluded from a taxpayer's income if used during tax year 2021 are not treated as wages for tax year 2022 if employers amended their plans accordingly. Moreover, unused amounts carried over from prior years or amounts available during an extended period for incurring claims are not taken into account in determining the annual limit applicable for the following year. This applies, for example, for carryover amounts of an FSA.


Advanced Child Tax Credit

Between July and December 2021 eligible families received advance payments on the child tax credit for tax year 2021. It applies to children under age 18 with $3,000 per child ($3,600 for children under 6). The amount is reduced in a first phaseout if certain income thresholds are exceeded. It is fully phased-out for taxpayers earning $400,000 for married filing jointly and $200,000 for all other filing statuses. Half of the amount that a family is eligible for was paid in advance; the other half can be claimed with the 2021 individual tax return. The IRS currently sends out Letter 6419 to provide the total amount of advance Child Tax Credit payments that were disbursed to a taxpayer during 2021.


If a taxpayer received the advance Child Tax Credit payments but upon filing the tax return, he does not meet the eligibility requirements or the payments received exceed the payments he is eligible for, any excess needs to be repaid as additional tax with the tax return. Certain taxpayers may qualify for full or partial relief through the repayment protection.


Refundable and enhanced of child and dependent care tax credit

For tax year 2021 the limit for eligible work-related expenses was increased to $8,000 for one qualifying person and $16,000 for two or more qualifying persons. Eligible work-related expenses include expenses that allow the taxpayer (and spouse if filing jointly) to work or look for work and only refer to expenses for care of a qualified person (e.g., expenses for care don't include amounts paid for food, lodging, clothing, education (expenses to attend kindergarten or a higher grade aren't expenses for care), and entertainment). The maximum expenses eligible for deduction are limited to earned income. For taxpayers filing married filing jointly the credit is limited to the lesser of the taxpayer's or the spouse's earned income.


Additionally, for tax year 2021, the child and dependent care credit is fully refundable if the taxpayer or spouse maintained a main home in the U.S. for more than half the tax year. Excluded are temporary absences from the main home, i.e., because of illness, education, business, vacation, or military service. 


Taxpayers who lived outside of the U.S. for more than half a year can claim the credit, however, only to the extent of his or her tax liability for the year.


Charitable contributions deductible by non-itemizers

For tax year 2021 taxpayers who are not itemizing their deductions are eligible to take a deduction of $300 ($600 if married filing jointly) for qualifying charitable contributions.


Various

For 2020 up to $10,200 of unemployment compensation ($20,400 for married filing jointly) was exempt from federal income tax for certain taxpayers. For tax year 2021, unemployment compensation is fully taxable.


The IRS is sending out Letter 6475 which states the payment of the third economic impact payments and other plus-up payments if prior payments were adjusted based on the 2020 tax return filed.


The suspension of required minimum distributions (RMDs) expired. Based on the taxpayers age, RMDs are required starting in 2021 (for taxpayers who reached age 70 1/2 in 2019) or 2022 (for taxpayers who reached 72 in 2021). RMDs are required for IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans and 457(b) plans.


For tax year 2021 the applicable minimum age for the Earned Income Tax Credit for certain individuals without children was reduced and the maximum age was suspended. Additionally, the earned income threshold and phase-out amounts were increased (IRC section 32(n)). The American Rescue Plan Act also allowed to use the 2019 earned income to calculate the credit if it exceeded the income in 2021. Both provisions expired as of January 1st, 2022. 


Other expiring provisions

Below is a list of additional expiring provisions in 2021 and 2022 that are likely to be less relevant for most taxpayers. The list, however, is not all inclusive. All provisions expired December 31, 2021, unless indicated otherwise by the date in parentheses.


Provisions expired in 2021

​1.
​Credit for qualified fuel cell motor vehicles
​2.
​Credit for two-wheeled plug-in electric vehicles
​3.
​Credit for health insurance costs of eligible individuals
​4.
​Premium assistance credit special rule for individuals who receive unemployment compensation
​5.
​Second generation biofuel producer credit 
​6.
​Increase in State low-income housing tax credit ceiling
​7.
​Beginning-of-construction date for renewable power facilities eligible to claim the renewable electricity production credit or investment credit in lieu of the production credit
​8.
​Credit for construction of new energy efficient homes
​9.
Increase in exclusion for employer-provided dependent care assistance
10.

Treatment of premiums for certain qualified mortgage insurance as qualified residence interest

​11.
​Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures
​12.
​Prevention of partial plan termination 
​13.
​Premium assistance for COBRA continuation coverage (9/30/21)
​14.
​Temporary extension of the funding improvement and rehabilitation periods for multi-employer pension plans in critical and endangered status for 2020 or 2021
​15.
​Adjustments to funding standard account rules  


Provisions Expiring December 31, 2022

​1.
​Premium assistance credit enhancements
​2.
​Allowance of full deduction for business meals provided by a restaurant
​3.
​Various incentives for biodiesel and renewable diesel
​4.
​Temporary delay of designation of multiemployer plans as in endangered, critical, or critical and declining status

 

If you have any questions, please contact your Rödl & Partner representative. 


This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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